With Sydney approaching its 100th consecutive day of lockdown and Melbourne on its way to potentially hitting 250 days of lockdown, we’ve looked at how Covid-19 has changed Australian lifestyle and financial habits.
To understand how credit score and missed payment trends across Australia have changed during COVID-19 in 2020 and 2021, ClearScore analysed credit scores and credit reports of its half a million users and combined this with their survey data collected over the last year.
- Credit Scores have been improving in Australia with 30% fewer missed payments on loans and active defaults down by 21%
- ClearScore users with the lowest credit scores have seen the biggest improvement in credit scores, up over 100 points in the last 12 months
- 1/3 of NSW residents report that their financial situation has worsened due to Covid-19 since July
- The recent lockdowns have hit people with low credit scores the hardest
- 6 in 10 Australian Buy Now Pay Later users have more than 1 account
- Only 12% of users understand what Open Banking is, but over half would be willing to share data through this method to get a loan
A credit score is a number between 0 to 1000 that represents the creditworthiness of an individual. Credit scores are calculated by credit bureaus, either Experian, Equifax or Illion, based on information available on credit reports such as payment history, defaults on loans and new credit enquiries. You can learn more about credit scores and how to improve them.
In general, Australians fall into distinct categories of credit score that give a guide of how easy it will be for you to access credit, with categories ranging from poor to excellent:
- Poor credit: 0-549
- Below average credit: 550 – 624
- Fair credit: 625 - 699
- Good credit: 700 - 799
- Excellent credit: 800+
Higher credit scores allow consumers to qualify for more financial products and often with lower interest rates. For example, a credit score of around 800 or above is generally required to qualify for the best interest rates on personal loans alongside having sufficient capacity (income less expenses) to afford to repay the loan.
We have found that the credit score of Australian users has improved over the last year suggesting that government relief measures such as JobKeeper, along with cautious spending may have allowed many Australians to reduce missed bill payments and improve their credit history during the past year.
Between the August 2020 and August 2021, the percentage of ClearScore users who had missed at least one payment fell from 12% to 9%. The number of users with active defaults, a much more serious impact on a credit score, declined by 21%. Only 1% of users registered any new form of default, less than half what would be registered in normal years.
There is also evidence that users continued to have lower appetite for credit with 15% fewer enquiries for credit registered. All these factors have helped ClearScore users see their credit score increase by 22 points in the year to August 2021.
That said, not all Australians experienced these improvements equally over the past year. Users with the lowest credit scores have seen the most dramatic improvements. One of the reasons that users can have a poor credit score is a default on a loan. More than 99% of users with a default on their credit report are classified as having a poor credit rating. The reduction in defaults over the last 12 months of Covid has had a dramatic impact therefore on improving the average credit scores of people who were classified as Poor credit score last year.
Credit Score band 12 months ago
Change in average credit score
Good (625 – 699)
Very Good (700-799)
The average reduction in score in the Very Good and Excellent categories is a bit harder to understand but is perhaps best explained that a small number of people in these categories (<1%) will experience some form of life event (job loss, disability, divorce, medical emergency) that can lead to a default. This will tend to mean that the average of the score of people in these groups goes down as a default will reduce your credit score by 500 or more. This goes to show the importance of maintaining a good credit history as much as possible.
We surveyed ClearScore users to ask them more detailed questions about how they were coping with the latest Covid-19 lockdowns.
- Over a quarter of Australians (27%) said their finances had got worse
- NSW was particularly hard hit with over a third (34%) saying they had been negatively impacted on finances since the latest lockdowns
- By contrast only 23% of Queenslanders said they had been impacted but this also demonstrates that the economic impact can reach far beyond the boundaries of a lockdown
Of the 5 states, NSW had the lowest increase in credit scores during the last year as well although its overall credit score on average still increased by 18 points.
Average Credit score increase
September job data released by the Treasury showed that NSW had more than 100,000 people on zero hours as a result of lockdown and 64,000 people left the workforce in August. Although unemployment has remained low through Covid-19 against our worst fears, it appears the lockdowns are now wreaking havoc on the economy.
In NSW, the heaviest lockdowns have been concentrated in Local Government Authorities called the ‘Areas of Concern’ with the lowest credit scores and income levels. With 34% of NSW statewide saying that their income has been negatively impacted, it is fair to assume that this level might be even higher in these LGAs with heaviest lockdowns.
Based on ClearScore data we found that all of the 12 ‘Areas of concern’ had below average credit scores, suggesting that people in these areas already had more difficulty than most obtaining credit when they need it.
Sydney 'Areas of Concern' LGAs
Average Credit Score
City of Parramatta
Penrith City Council
Liverpool City Council
Cantery-Bankstown City Council
Liverpool Plains City Council
Fairfield City Council
Blacktown City Council
Campbelltown City Council
By contrast, the LGAs with the highest credit scores in Sydney were primarily concentrated in richer northern suburbs of the city. According to ATO data, 7 out of 10 of these LGAs have average income in excess of $100,000.
Sydney LGAs with highest credit scores
Average credit score
For more articles on credit scores by regions see these links:
Credit score bands are also correlates with how hard Covid-19 is impacting different groups. Those with the lowest scores have 1.5 times more likely to be experiencing a negative impact to their finances that those with the best credit scores
- Excellent credit score users (800-1000): only 1 in 5 of users claim the latest lockdown is negatively impacting their finances
- Poor (0-549) and Below Average (550-624): one third of users claim lockdowns are negatively impacting their finances
The lowest credit score band (0-549, or “poor”) is also the most vulnerable to a shock to income as they struggle more than most to make all their payments for credit on time. They missed an average of 0.39 missed payments on their credit reports in the last 12 months, while Australians in the highest credit score tier (800-1000, or “excellent”) only average 0.0039 missed payments on their credit reports – 100 times less.
Perhaps the biggest change to consumer habits during Covid-19 has been that users have increasingly switched to buying online and often using Buy Now Pay Later to pay for those transactions. As we will see BNPL has also been a lifeline for many during Covid-19 as it is a form of credit that is much easier to obtain in times of economic stress.
Buy Now Pay Later has exploded in Australia, culminating recently in the $39 billion sale of local Aussie BNPL Afterpay to Square in the US.
Roughly half of ClearScore users claim to have a Buy Now Pay Later account and this seems to be stable over the last year according to our user’s declared data. The number of users applying for new BNPL continues to be high with around 4 in 10 users saying that they applied for a new account in the past 12 months.
The trend is now towards multiple Buy Now Pay Later accounts with 6 in 10 users claiming to use more than one provider. 3 in 10 users have at least 3 Buy Now Pay Later accounts and 12% of users have four or more.
In terms of market share, Afterpay continues to be the market-leader. According to user declared data, of those who use BNPL:
- 80% said that they had used Afterpay
- 49% had used Zip
- 22% Humm
- 20% Openpay
- 15% Latitude Pay
- Klarna & Paypal each had 7% of users claiming they had used these services
A roundup of small players: Pay it later, Brighte, Payright and the new Commbank BNPL Steppay were all around 1% (though very early for Steppay).
With Afterpay being so dominant in BNPL, you might expect that it is their users who are most likely to have multiple BNPL accounts. However, we found that approximately 9 in 10 Zip, Humm, Openpay and Latitude users had more than one BNPL. For Afterpay, only 2 in 3 users had more than one BNPL.
Buy Now Pay Later provider
% of users with other BNPL accounts
For BNPL providers like Humm, Openpay, Latitude and Zip users there is no clear brand loyalty. When talking to Jenni from NSW about why she used multiple BNPL accounts, she summed it up as “different shops use different providers so you can’t just use Afterpay”. Several users cited that they opened a Openpay account so they could use Buy Now Pay Later at Bunnings for example (Bunnings now also accepts Zip but not the market-leader Afterpay).
“The willingness of consumers to open multiple BNPL accounts has two implications for the industry” say Stephen Smyth, Managing Director of ClearScore Australia. “First, if consumers are willing to have multiple accounts, retailers will use this to get BNPL providers to compete against each other and this should eventually chip away at the very high margin of 4-5% that BNPLs charge per transaction. This reduced margin which will drive some of the smaller players out of business.”
“Second, there is a risk that consumers build up an unaffordable amount of debt in a short timeframe that is not visible to the individual Buy Now Pay Later providers. If 9 in 10 of your BNPL users are also using 2-3 competitor products, you need to get better at assessing if they can afford to borrow more. BNPL need to follow responsible lending regulations to combat this. “
The increased likelihood of regulation also brings risks that heavy-handed regulation could reduce competition and make it harder for consumers to get access to BNPL.
As BNPL is not regulated as consumer credit, almost anyone can get credit on BNPL. This has meant some people with lower credit scores and incomes, who were shut out of getting access to loans and credit cards, have been able to get critical access to funds when they most need it during challenging Covid-19 conditions.
The best example of how BNPL has helped users during Covid came from one of our users Cathy in Queensland. A single mum with 3 children, she lost her income when her freelance events work evaporated with Covid. Just as she lost all her income, her fridge and TV broke. No-one would have given her a loan at this stage under responsible lending regulations in Australia. However, Cathy was able to buy a replacement fridge and TV on Buy Now Pay Later. She paid them off and now uses BNPL regularly so she can bulk buy on special deals and save money.
Examples like Cathy show that BNPL has transformed access to credit for many Australians and is proving a useful product to many more. As regulation comes to the sector it is important to preserve the benefits of BNPL as well as manage the risks of responsible lending.
While Covid-19 has been raging, Open banking has been launched in Australia with the promise of making it easier for Australians to share their data and get access to better financial deals. Open Banking gives you the ability to share your banking data with third parties. This will allow you to get better-suited banking products and switch products or banks more easily. Banks customers have been able to give permission to accredited third parties to access mortgage, credit card, saving and personal loan information since the second half of 2020.
Our findings are that Australians are still relatively unaware of what open banking is. Only 12% of our users are aware of what Open Banking is according to our survey in September 2021. This is a similar result to our survey conducted a year ago. It is fair to say that Open Banking has yet to make a major impact on Australians so far.
Some segment of users seemed to know more about Open Banking than others. On average 15% of men said they knew what Open Banking was but only 9% of women (we were not able to verify whether men really knew or not). People who were retired were less likely to know what Open Banking was (8%) as were 18-24 year olds (3%). There also seemed to be some correlation with stated income with those on lower incomes one third less likely to state they knew what Open Banking was relative to high income earners.
When we explained Open Banking to survey responders, just over half (56%) said that they would give Open Banking access to allow their income to be verified for the purpose of applying for loans. Many lenders actually now report that 70-90% of loan applicants will share their bank data electronically either through Open Banking or a similar technology called screen scraping. Willingness to use Open Banking varied quite substantially across different groups. Two thirds of people under 45 said they would share their bank data through Open Banking, but less than 50% of people 45 and over would. Responses varied quite a lot by state with Queenslanders 15% more likely to share data than people from NSW or Victoria.
One of the biggest differences in willingness to share data was based on credit score band. People who have more difficulty accessing credit are much more likely to share bank data to get a loan. ClearScore users with lower scores (<700) would share data two thirds of the time. However, users with Excellent credit scores (800+) would only share data less than half of the time.
“Open Banking is still evolving in Australia” says Stephen Smyth, the Managing Director of ClearScore Australia, “Under responsible lending regulations, lenders have to verify income and expenses when you apply for a loan to check if you can afford the loan. Open Banking has the promise to make this a very easy thing to do, but with evolving regulation in this space, we are not there yet. Open Banking will be deemed a success when a consumer can transfer their data securely with minimum hassle in 1-2 seconds: this is what will make the difference in helping consumers save money on their banking products.”
ClearScore analysed historical credit scores and credit report data of half a million users for this study and combined with 4,684 responses from surveys spanning from Q1 2020 to Q1 2021. Credit Scores are sourced from Experian.
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